Early stage investment soars amid 'extreme risk'- report

Early stage investing is enjoying a surge in popularity in New Zealand. The record levels of angel investment, growing venture capitalist numbers, and emergence of equity crowdfunders all bode well for entrepreneurs trying to bolster their young companies.

But those involved at the coal-face warn there are great risks involved and a high likelihood all investment will be lost.

The New Zealand Venture Investment Fund warns at least four in 10 early stage companies fail, and points to its own experience as a lesson.

The NZVIF has released research from its 12 years in action, which shows for every $1 of initial investment, two to four times more is needed for follow-on investment, and while a fifth of exits have earned back the level of investment or better, 40% of the portfolio has been written off or is valued at less than the amount invested.

NZVIF investment director Malachi Russell tells NBR that significant amounts of vetting occur and for the 187 companies the fund is invested in, another 1000-1500 have been looked at and passed over.

“But once the decision has been made to invest in companies like these, you must be in it for the long haul as they may need more money. Be prepared for the company to not last the distance.

“For internationally-orientated seed and start-up companies the risk profile is extreme and they’re highly illiquid assets; it’s almost impossible to sell the investment in the first few years of operating. It’s an extreme risk and we can see that coming through in our data.”

The same goes for equity crowdfunding companies, he and Shareholders’ Association founder Bruce Sheppard say.